Time to upgrade your business structure?
When dealing with lots of smaller businesses and start-ups, one of the most common business structures is to start off as a sole trader. This is the simplest business structure and means that you have an Australian Business Number (ABN) attached to your personal name.
So, why might you consider changing to a company structure? Or start off as a company from the beginning?
The first important consideration is asset protection. As a sole trader if a claim is made against your business then it is a claim against you personally. This is because the ABN is attached to your personal name and there is no degree of separation. With trading under a company structure, if a claim is made against the business then it is against the company and only the company’s assets are at risk. Typically, the owners are not exposed personally. It is important to note however, that there are circumstances that a Director of the company can be personally liable for debts of the company such as unpaid superannuation or if continuing to trade while insolvent.
Key takeaway – if you own personal assets or are starting to build them up (such as a family home or investments) then by trading through a company structure you are adding an extra layer of protection for yourself.
Key takeaway – if you are operating in a highly litigious industry such as the building and construction industry, then it would be very important to consider asset protection as part of the business structure plans.
A second consideration is around taxation. As a sole trader you are taxed at your marginal tax rate anywhere from zero to 47% including Medicare levy! The small business company tax rate (turnover under $50m) is currently a flat 26% with plans to decrease to 25% under the current government by 2021/22.
Key takeaway – if your business is making considerable profits then there is the potential to save thousands of dollars in tax every year.
Next, is the ability to change ownership by bringing partners on board. As a sole trader you are the sole business owner, and everything is on you. With a company structure the business has shares and these can be owned by multiple people or structures. This can help facilitate the business to grow and expand, along with being able to share the load.
Key takeaway – a company structure allows for multiple owners that can be changed over time.
In SummaryWithout doubt, there is a lot more involved when making such a big decision regarding your business structure with many more pros and cons to review and consider. So, when deciding on an appropriate business structure or deciding when might be the right time to change you should consider all options, and you should contact your local Highview accountant to discuss!
Article written by Beau Appleby, Associate Partner Highview Accounting & Financial Prahran.
Another article you might be interested in: SOLE TRADERS’ BIGGEST RISKS & HOW TO INSURE FOR THEM. Read it here.